The following are some thoughts on excerpts from the "deflation" article at Wikipedia
Because the price of goods is falling, consumers have an incentive to delay purchases and consumption until prices fall further, which in turn reduces overall economic activity - contributing to the deflationary spiral.
It only reduces economic activity if the economy has no other goals. For example, if nobody feels like they need the latest computers because their previous one is still "fast enough" that doesn't mean they don't want the choice to be able to get an even faster computer a few years down the line. It boils down to a matter of how your economy defines wealth. If your economy defines it by measuring how much gold or foreign currencies it can hold in its treasury, that's a completely different scenario from one in which your economy defines it by measuring, for example, its ability to produce fast computers (or grain, or electricity, or housing, or whatever).
If a nation focuses on its ability to produce certain things, is that just an example of the much-maligned word: "protectionism
"? Well, you can think of it like this: You have a house. The local power company produces your electricity and sends it to your house. One day, a winter storm knocks out the electricity in your town. You go out and buy a generator
. While the electric company is busy trying to repair power lines, you are nice and toasty in your house and the pump in your basement can still keep it from getting flooded. Eventually, the power company restores service to your house, so you turn off your generator, since the generator is not as efficient at generating electricity as the power company. Over the years, however, you maintain your generator - making sure it's in working condition and doesn't become a lump of rust. Is that "protectionism"? Is it an inefficient use of your time and labor, when you should be accepting "comparative advantage
" instead? The thing is, you've recognized that the generator has value, even if you are not currently using it to produce anything - even if you have no "demand
" for its output at the moment. It is a source of wealth that you have maintained, even if you've chosen not to tap that wealth at this time.
The same would be true of an economy that measures its internal wealth by its productive ability, even in times of low demand
. After all, sometimes when people aren't demanding anything, it might just mean they are content with their lives. Why bother with the trouble of using up the earth's resources by advertising
things to them if they are already happy?
While an increase in the purchasing power of one's money sounds beneficial, it can actually cause hardship when the majority of one's net worth is held in illiquid assets such as homes, land, and other forms of private property.
Assuming it's a capitalist
economy, which assumes no responsibility for the economic welfare of its people, then this would only be a problem if the relative value of the person's net worth is falling in relation to other goods and services he needs (food, water, electricity, football tickets
). However, if it's just deflation across the board, and the value of the person's home, land, and other assorted junk is not changing relative to the value of food, water, etc, then it makes little difference.
Deflation raises real wages, which are both difficult and costly for management to lower. This frequently leads to layoffs and makes employers reluctant to hire new workers, increasing unemployment.
This would not be a problem if the employees themselves had democratic control
over the company. If the company is getting less revenue
in terms of dollar amounts, they could simply vote themselves a pay-cut - and if the cost of living
is falling, it wouldn't even matter much with respect to how much they can buy with their salaries.